Robust consumer spending amid increasing disposable income levels and economic growth, unique product offerings to meet evolving customer preferences, the rising popularity of e-commerce platforms, and technological advancements are primary factors contributing to the profitability of the specialty retailer industry.

Therefore, it could be wise to invest in fundamentally sound specialty retailer stocks The ODP Corporation (ODP) and Aeon Co., Ltd. (AONNY) now. However, struggling GameStop Corp. (GME) is best avoided now.

The Commerce Department reported that retail sales grew 0.6% for December, bolstered by a pickup in clothing and accessory stores along with online nonstore businesses. The results exceeded economists’ expectations of 0.4% growth. On an annual basis, retail sales ended 2023 with a 5.6% rise, showing that consumers are more than keeping up with inflation.

Moreover, rising disposable income levels and economic growth have boosted consumer spending on discretionary items. The specialty products market is expected to register a CAGR of 9.4%, resulting in a market volume of $9.07 billion by 2028.

With evolving consumer preferences, there is an increasing demand for personalized and experiential shopping experiences. Specialty retailers are now focusing on niche or tailored offerings to meet changing needs and capture market share. Also, the surge in e-commerce platforms has opened up new avenues for retailers.

With the growing usage of smartphones and internet services, e-commerce has emerged as a major shopping platform globally. According to Statista, the U.S. will rank first among 20 countries across the world in retail e-commerce development between 2024 and 2028, with a CAGR of 11.8%. The U.S. e-commerce market is currently valued at around 843 billion.

With these favorable market trends in mind, let’s look at the fundamentals of the three Specialty Retailers stocks, beginning with the third choice.

Stock to Sell:

Stock #3: GameStop Corp. (GME)

GME is a specialty retailer that offers games and entertainment products through its stores and e-commerce platforms internationally. The company sells new and pre-owned gaming platforms, accessories, such as controllers, gaming headsets, and virtual reality products; new and pre-owned gaming software; and in-game digital currency.

GME’s trailing-12-month gross profit margin and levered FCF margin of 24.10% and 3.73% are 32.1% and 32.3% lower than the industry averages of 35.51% and 5.51%, respectively. In addition, the stock’s trailing-12-month CAPEX/Sales of 0.68% is considerably lower than the industry average of 3.04%.

In terms of forward non-GAAP P/E, GME is trading at 133.91x, significantly higher than the industry average of 15.80x. Likewise, the stock’s forward EV/EBITDA multiple of 31.46 is 217% higher than the industry average of 9.92.

For the third quarter, which ended October 28, 2023, GME’s net sales decreased 9.1% year-over-year to $1.08 billion, while its gross profit declined 3.4% from the year-ago value to $281.80 billion. The company’s operating loss came in at $14.70 million for the quarter.

Furthermore, the company reported a net loss of $3.10 million, or $0.01 per share, respectively.

Analysts expect GME’s revenue for the fourth quarter (ended January 2024) to decrease 7.1% year-over-year to $2.07 billion. Similarly, for the fiscal year 2025, the consensus revenue estimate of $5.25 billion indicates a 4.5% year-over-year decline.

Over the past six months, the stock has plunged 29% to close the last trading session at $14.17.

GME’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

GME has a D for Value, Momentum, and Stability. It is ranked #33 out of 41 stocks in the Specialty Retailers industry.

In addition to the POWR Ratings we’ve stated above, we also have other ratings for GME (Growth, Sentiment, and Quality). Get all GME ratings here.

Stocks to Buy:

Stock #2: The ODP Corporation (ODP)

ODP offers business services and supplies, products, and digital workplace technology solutions for small, medium, and enterprise businesses in the United States, Puerto Rico, and the U.S. Virgin Islands. It operates through four divisions: ODP Business Solutions; Office Depot; Veyer; and Varis.

The company continues to execute under its previously announced repurchase authorization of $1 billion share, available through the end of the year 2025. During the third quarter of 2023, ODP repurchased about 659 thousand shares at a cost of $32 million.

Since the inception of the authorization, starting in November 2022, ODP has repurchased 9 million shares for nearly $420 million. Share repurchases enable the company to raise shareholder value.

ODP’s trailing-12-month ROCE and ROTC of 16% and 7.60% are 43.5% and 25.9% higher than the respective industry averages of 11.13% and 6.03%. Likewise, the stock’s trailing-12-month ROTA of 4.85% is 15.4% higher than the industry average of 4.20%.

In terms of forward non-GAAP P/E, ODP is trading at 9.59x, 39.3% lower than the industry average of 15.80x. Likewise, the stock’s forward EV/Sales multiple of 0.32 is 73.5% lower than the industry average of 1.21. Also, its forward Price/Book of 1.79x is 31.6% lower than the industry average of 2.62x.

During the third quarter that ended September 30, 2023, ODP reported sales of $2.01 billion, while its gross profit was $474 million for the same period. The company’s operating income rose 8.3% year-over-year to $91 million. Its net income and EPS came in at $70 million and $1.79, increases of 4.5% and 2.5% from the prior year’s period, respectively.

The company updated its full-year guidance for 2023. ODP expects its sales to range between $7.80 billion and $7.90 billion. Its adjusted operating income is expected to be $280 million to $310 million, up from the prior guidance of $270 million to $300 million. It expects adjusted EBITDA and adjusted free cash flow to be $400 - $430 million and $200 - $230 million, respectively.

In addition, the company raised its adjusted earnings per share from $5 - $5.30 to $5.30 - $5.60.

Street expects ODP’s EPS for the fiscal year (ended December 2023) to increase 24% year-over-year to $5.45. For the ongoing quarter (ending March 2024), the company’s EPS is expected to grow 2.2% year-over-year to $1.82. Moreover, the company has surpassed the consensus EPS estimates in all four trailing quarters.

ODP’s stock has surged 2.2% over the past month and 8.3% over the past six months to close the last trading session at $52.30.

ODP’s POWR Ratings reflect its promising prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

The stock has a B grade for Quality, Growth, and Value. Within the same industry, ODP is ranked #3 of 41 stocks.

Click here to access additional ratings of ODP for Stability, Momentum, and Sentiment.

Stock #1: Aeon Co., Ltd. (AONNY)

AONNY is a retail company headquartered in Chiba, Japan. Its segments include General Merchandise Store (GMS) Business; Discount Store Business; Supermarket (SM) Business; Health and Wellness Business; Financial Services Business; Shopping Center Development Business; Services and Specialty Store Business; International Business; and Other Business.

AONNY’s trailing-12-month gross profit margin of 37.03% is 9.9% higher than the respective industry average of 33.70%. Likewise, the stock’s trailing-12-month CAPEX/Sales of 4.36% is 36.4% higher than the industry average of 3.19%.

In terms of forward EV/Sales, AONNY is trading at 0.60x, 63.2% lower than the industry average of 1.64x. Similarly, the stock’s forward EV/EBITDA multiple of 9.88 is 11.6% lower than the industry average of 11.18. Also, its forward Price/Sales of 0.32x is 71.4% lower than the industry average of 1.12x.

AONNY’s revenue and EBITDA have grown at respective CAGRs of 3.1% and 4.2% over the past three years. The company’s EBIT has increased 9.8% over the same timeframe, while its normalized net income and total assets have improved at CAGRs of 8.7% and 4.8%, respectively.

For the nine months that ended November 30, 2023, AONNY’s operating revenue increased 4.5% year-over-year to ¥7.02 trillion ($46.83 billion). The company’s gross profit grew 6.4% from the prior year’s period to ¥1.74 trillion ($11.61 billion). Its operating profit rose 26.7%% year-over-year to ¥142.82 billion ($952.02 million).

Also, the company’s profit was ¥58.18 billion ($387.85 million), indicating a growth of 27.9% from the previous year’s period. Its total assets were ¥13.01 trillion ($86.72 billion) as of November 30, 2023, compared to ¥12.34 trillion ($82.26 billion) as of February 28, 2023.

Analysts expect AONNY’s revenue for the fiscal year (ending February 2024) to increase significantly year-over-year to $64.38 billion. The company’s revenue for the fiscal year 2025 is expected to grow 3.6% year-over-year to $66.69 billion. Also, the company has topped the consensus revenue estimates in all four trailing quarters, which is remarkable.

Shares of AONNY have gained 11.5% over the past six months and 21.1% over the past year to close the last trading session at $24.07.

AONNY’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

The stock has an A grade for Growth and a B for Quality and Stability. AONNY is ranked #2 out of 41 stocks in the Specialty Retailers industry.

Click here to access AONNY’s additional ratings for Sentiment, Value, and Momentum.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

AONNY shares were unchanged in premarket trading Wednesday. Year-to-date, AONNY has gained 6.01%, versus a 4.44% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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